Does Cross-Selling Deserve to Be Demonized?

In the weeks since it came to light that thousands of Wells Fargo employees fraudulently signed up customers for unwanted services in order to inflate their bonuses, some members of Congress have been strident in their condemnation of cross-selling, a practice they say lies at the heart of the scandal.

Cross-selling involves persuading customers who use one bank product or service, such as a checking account, to sign up for additional services, such as a credit card or a home loan.

Wells had long boasted of its cross-selling prowess, and the practice has become common at banks as a way to boost profits in an era of chronically low net interest margins. Now, however, with 5,300 Wells employees having been fired for their part in the fraud, it has become practically a four-letter word in some circles.

But a number of experts defended the practice in recent interviews, while highlighting specific problems with Wells' sales culture.

"This is being blown out of proportion," said Charles Wendel, president of the consulting firm FIC Advisors. "Banks have to do cross-selling because there are only so many places from which they can generate revenue."

There are other motives too. If they are selling the right products and services, banks keep customers satisfied and prevent them from taking their business elsewhere, Wendel said.

Wells' efforts to create such "sticky" customer relationships may have backfired, but that doesn't invalidate the effort, said Stephen Biggar, an analyst at Argus Research who covers Wells. "Wells obviously violated some trust with the customers here with some rogue employees. That doesn't mean the premise of cross-selling is faulty,” he said.

Given the harsh spotlight on Wells, however, other banks are now loath to openly defend cross-selling; to do so, they believe, would be tantamount to standing up and shouting "I am Spartacus" right alongside the troubled megabank.

"We believe that our needs-based sales approach and tight controls enable us to deepen relationships in a way that ensures we put customers first," is the most that a spokesman at the $149 billion-asset Citizens Financial Group would say.

But privately, bankers say there is value in cross-selling, provided it is done in a way that best serves the customer.

Indeed, Citizens may offer an example of how to do it right. Since February, the Providence, R.I., bank has been running a "checkup" initiative that gives customers a chance to meet face-to-face with a banker to discuss their financial needs.

At an investor conference hosted by Deutsche Bank last June, Brad Conner, vice chairman of Citizens' consumer banking division, compared the program to an annual physical checkup at a doctor's office. It ensures that customers are being sold only the products and services that match their true needs and desires. Better still, every session is documented and a summary is provided to the customer.

The bank has contacted more than 1 million of its approximately 3 million customers about a checkup so far, and it has scheduled more than 250,000 appointments, of which many have already been completed. A Citizens spokesman calls the eight-month-old initiative a "significant component" of the bank's sales efforts.

Another way to prevent abuse, of course, is simply not to incentivize salespeople to do cross-selling at all. That is the approach taken by Ally Financial, an online bank that only began expanding its consumer banking products beyond simple deposit accounts earlier this year.

An Ally spokeswoman said the Detroit company is in the early stages of figuring out how to deepen its relationships with existing customers. "Any efforts we make to educate customers about our banking products and services are done in the customer's interest and not based on a quota or incentive for the employee," she said.

The best banks, Wendel agrees, will sell their customers only on products and services from which they truly stand to benefit.

"Now, they will get paid money for it. But they aren't going to get so much money that they're going to get a corporate jet out of it," he said. "And it's so hard today to get a customer, and to retain a customer, that most banks are going to be making sure that their customer is being well-served."

The problem at Wells — though it is not exclusive to Wells — was that pay was based only on sales, not customer retention, said Mike Moebs, an economist and the chief executive of the economic research firm Moebs Services. Rather than being compensated for keeping customers happy and active over a period of time, Wells people were receiving bonuses simply for opening accounts — hence the ability to fatten their bonuses through fraud.

"Should cross-selling be demonized? Not at all," Moebs said. "In fact, it has to be properly done in order for banks to make money."

Banks, added Moebs, "have to concentrate on where they can charge for the servicing of the customer as opposed to just the sale of the service. If they do that, they can create fee income opportunities that will help their bottom line."

Biggar agrees that thinking in terms of services rather than products would change banks' sales culture for the better.

"When you have a retention component to any compensation incentive, that makes the employee a willing party in making sure the customer is happy," he said.

Wells agreed to pay a $185 million fine to settle the matter with federal regulators. It also plans to pay $5 million to make things right with customers who got hit with fees for products and services they never requested.

The penalties have done little to quell outrage on Capitol Hill. Wells Chief Executive John Stumpf has recently been hammered by lawmakers who want to hold him accountable for the malfeasance at his bank. On Tuesday, a group of House lawmakers sent a letter to banking regulators and the head of the U.S. Small Business Administration urging them to investigate whether the fraud at Wells Fargo extended to its small-business lending division.

But even Richard Cordray, director of the Consumer Financial Protection Bureau, defended the practice of cross-selling when announcing the enforcement action against Wells.

Speaking to members of the press last month, Cordray called it a "common approach" that, when done right, "should lead banks to devote more attention and resources to strong customer service, since the easiest and best way to earn more business from existing customers is by giving them superior value and excellent service."

Banking industry experts, asked to explain what they saw as grandstanding by members of Congress, were quick to point out that 2016 is an election year.

"It's a lot of ado about nothing," Wendel said. "But unfortunately there is a lot of ado."

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